Can housing ever actually drop?

dude7691

Hi all,

As the title may or may not indicate, I'm starting to question everything I thought I knew about housing. A bit of background first. I'm currently 21 and living at home in a tiny annexe (worth £40k or so) paying a low amount of rent, but obviously I don't want to stay here forever. Also, the annexe is needed for another person after I move out so I feel very pressured to do so. I live in Pembrokeshire, Wales, so there are zero job prospects here except retail jobs which are dead end. Am currently studying an economics degree, due to graduate in 2024. I want to buy a house in Swansea, a 2 bed terraced house would be fine and currently goes for around £100k for a reasonable one. I've currently saved just over £43k towards a deposit, but have an income comprising only of student grants and online work that I do (I file self employed tax returns) and get about £14k a year in total (combining these). I'm on track to save roughly £85k by 2024. I've already got a LISA, and the max I'll realistically be able to borrow is around £60k, as I'll probably end up on min wage for a period after a graduate. I've literally been a hermit for 3 years (since 18) only leaving the house for work (when I was working away from home), sold my car, cut off all my friends and stopped all spending except absolute essentials and have lived this way for 3 years, can't cut my outgoings any more than I have. I spent a total of £35 on discretionary spending last year It may be paranoia but I'm so frustrated with the way things are right now that I'm just trying to stack the odds in my favour so I can at least say I tried. My options to increase my income are limited, as I have to devote a huge portion of my time to my degree and online work sucks the rest. 

Anyway, onto my main question. I don't know if I'm starting to go insane but I'm starting to believe it is impossible for housing not to skyrocket with no falls for the coming few decades. The government is clearly hellbent on pumping house prices at 10% a year no matter what, and the BOE although supposedly independent is blatantly subsidising manipulation of the housing market with zero interest rates (negative ones probably coming soon if houses drop more than a fraction of a percent). Even if house prices crashed, they'd just drop interest rates to stop it immediately I suspect, or Rishi would come up with some other dull scheme that fails to address the supply issue. All this would make that £100k house worth £146k in 4 years time. How worried should I be about this? Are we really now in a scenario where it will be impossible for me to move out (barre renting, which I would try to avoid doing at all costs except at a very low price). It's getting to the point where it's killing my motivation to save and I just want to put the money in risky investments for a lottery ticket at being able to keep up with artificially inflated house prices. Can someone please tell me I'm not being an idiot playing it safe and not putting money I need in 4 years into eternally rising stocks I am aware crashes and bear markets happen, but we've never had a bull market subsidised on QE and extreme money printing designed purely to inflate assets, so maybe the "rulebook" has changed to allow it to never go down for more than a month or two, being generous. 

Are there any instruments to hedge against house price rises that can be reasonably accessed in the UK? (except buying property of course). Would love to see something like this so I could "lock in" my deposit at current prices and just have my capital appreciate and depreciate at the same rate as housing does, rather than the pathetic interest rate I get currently (1.02% with Al Rayan). 

What countries have more reasonable house price - income ratios, that are also safe? I've been thinking about moving abroad, and there's lots of areas in the US that have reasonable ratios and look mildly affordable. If the pound gains strength over the coming years (if the fed continues to abolish their own free market ) then there's a chance a weak dollar could make it a viable option if the pound outperforms more than the inevitable real estate rise that would bring over there. I don't want to move abroad, and it's a last resort, but I don't want to let a fraudulent government/central bank kill my efforts. 

Just adding this on for new readers as a reply gave me an idea. Once you've secured a mortgage, does your income decreasing have to be declared to the bank? Theoretically I could get a summer job for 4-6 months whilst I'm off from study, get the mortgage, then leave that job to resume focusing on my degree, and pay the mortgage out of the income I currently have (that won't change for the foreseeable). 

Sorry if this post came off as a bit rant-esque, just sick of plundering all my resources into one goal that has moved away further than I could ever have anticipated. 

Thanks  

jamei305

No one can predict the future for houses prices so I won't.

The best hedge is surely to buy the house now - you have enough of a deposit for a BTL mortgage, and there are some available that are based purely on the rental income and don't require you to have an income yourself. Then you rent via an agent for the next few years until you're ready to move in. You might not make big bucks in rental profit but unlike other BTL investors your aim need only be to break even.

FatherTireseus

Back in the 1990s, my partner and I bought a house for around £60k.  IIRC it was just at a time when house prices had gone through a boom as the government used to give tax relief on mortgage interest payments and were about to withdraw the ability for unmarried couples to pool their allowances and get double tax relief. Hence a big rush to buy property and prices shot up.

A few years later we moved for work reasons and sold the house for £45k, pretty much in the state we'd bought it apart from decorating. 

So yes it can happen!

But that was decades ago and things have changed since. I'm no expert on the housing market but it seems to me that quite a lot of factors are in play, some of which will be more pertinent to different parts of the country.  There are quite a few factors that have pushed up demand in recent years. 

- demographics: over time we're living longer (covid aside) and there are more single person households.

- the expansion of university education has meant more students in university towns. Some of this extra demand will be mopped up by purpose built university accommodation,  but not all.  

- government incentives as you mention: things like Help to buy, or stamp duty holidays,  it seems to me,  just push up prices (and housebuilding firm profits).

- immigration: increased numbers of people arriving from Europe pushes up demand against a supply that's only going to increase slowly in the short term.  It will be interesting to see how many people from Hong Kong who may have the right to settle here, will actually come.

Of course covid has changed the market somewhat; it's reported many Europeans may have left the UK but whether that is for good, who knows.  University students may wonder why they are paying for accommodation in their university town when all their lectures are online.  People may be moving out of cities as they realise they can get bigger properties away from the city for the same price as a city centre flat; and they may now be able to work from home meaning it's more feasible to live away from the office. 

In short,  a lot of moving parts and I don't think all areas of the country will see house prices move in the same way.  But as long as the government continues to offer incentives I'd be surprised if there was a nationwide massive crash in prices.

I've only ever lived in this country so can't comment on which countries offer 'better value'.   But from what I read, not New Zealand. 

dude7691

jamei305 said:

No one can predict the future for houses prices so I won't.

The best hedge is surely to buy the house now - you have enough of a deposit for a BTL mortgage, and there are some available that are based purely on the rental income and don't require you to have an income yourself. Then you rent via an agent for the next few years until you're ready to move in. You might not make big bucks in rental profit but unlike other BTL investors your aim need only be to break even.

Hi There  

That would be a great idea if my money wasn't tied up in my LISA. I currently have £10k in there, and about £11k of my money is tied up in a BLME 3 year fix that expires in Oct 2022, paying out 2.45% annually. Hence, in terms of liquid cash I only have around £22k, which with my current income wouldn't even scratch the surface when it comes to borrowing. The earliest I could possibly buy would be the summer of 2023, by which time I'd have around 70k. Could get a summer job for 4-6 months and do it full time to secure a 40 year mortgage as a residential buyer. The issue of course is I couldn't keep that job full time, because of my degree. I still have an income more than sufficient to pay it. I guess what the bank doesn't know wouldn't hurt them Unless they can actually track your income after you've been approved and are making payments? 

dude7691

FatherTireseus said:

Back in the 1990s, my partner and I bought a house for around £60k.  IIRC it was just at a time when house prices had gone through a boom as the government used to give tax relief on mortgage interest payments and were about to withdraw the ability for unmarried couples to pool their allowances and get double tax relief. Hence a big rush to buy property and prices shot up.

A few years later we moved for work reasons and sold the house for £45k, pretty much in the state we'd bought it apart from decorating. 

So yes it can happen!

But that was decades ago and things have changed since. I'm no expert on the housing market but it seems to me that quite a lot of factors are in play, some of which will be more pertinent to different parts of the country.  There are quite a few factors that have pushed up demand in recent years. 

- demographics: over time we're living longer (covid aside) and there are more single person households.

- the expansion of university education has meant more students in university towns. Some of this extra demand will be mopped up by purpose built university accommodation,  but not all.  

- government incentives as you mention: things like Help to buy, or stamp duty holidays,  it seems to me,  just push up prices (and housebuilding firm profits).

- immigration: increased numbers of people arriving from Europe pushes up demand against a supply that's only going to increase slowly in the short term.  It will be interesting to see how many people from Hong Kong who may have the right to settle here, will actually come.

Of course covid has changed the market somewhat; it's reported many Europeans may have left the UK but whether that is for good, who knows.  University students may wonder why they are paying for accommodation in their university town when all their lectures are online.  People may be moving out of cities as they realise they can get bigger properties away from the city for the same price as a city centre flat; and they may now be able to work from home meaning it's more feasible to live away from the office. 

In short,  a lot of moving parts and I don't think all areas of the country will see house prices move in the same way.  But as long as the government continues to offer incentives I'd be surprised if there was a nationwide massive crash in prices.

I've only ever lived in this country so can't comment on which countries offer 'better value'.   But from what I read, not New Zealand. 

Wow! That is a significant fall, of course variable by area but that's 25% off in just a few years. 

Will reply to these in order:

Demographics - Yes I do agree with that, ageing population and the increase of single person households is definitely an upward pressure. 

Uni Education - From personal experience I haven't seen that as of yet, but you may be right in the coming years. Of course last year, most people already had their contracts signed at student halls, and were stuck there. I'm with the OU, so never had to worry about this. Very lucky on my part, my total debt will only come out to £10k and I've had a pretty good education from what I can tell.

Gov incentives - Absolutely makes sense, I've taken advantage of one with a LISA of course. My question is how long that can continue, or if they'd be contented with 3-4% annual growth after the craze we've had this year. (Anything up to 5% I could just about be okay with). 

Immigration - Yes absolutely, basic function of demand will increase that. Don't think any major restrictions would have an impact for the next decade or so, especially as homebuilding simply won't keep up. 

The "gentrification" effect I can absolutely see pushing prices higher in rural areas which is the biggest issue for me. I've never had the desire to live in a city, it doesn't make sense to me from a cost of living versus earnings perspective. My goal long term is purely wealth accumulation, so I don't care if I earn less, as long as my net disposable income is higher. Just to make clear, my house would purely be a hedge against renting, nothing more and nothing less. My aspirations for what I just mentioned are through equities long term, which I see as a better route personally. You're right that a lot of people may have had a wake up call regarding the fact you can get equivalent standard quality for a quarter of the price in Wales vs London for example. Some of this may die down after covid and a return to the office, but that's speculating. 

Yeah, my best shot is that they're comfortable with a modest level of growth (3-4% a year) so I'm not completely priced out. I'd already budgeted with that in mind, I have no problem with asset owners getting rewarded as a free market should, just not to the ridiculous extent that price becomes unpredictable and volatile (in either direction). 

Haha yes New Zealand's gov apparently is trying to mitigate it a bit, but we'll see how that works out. 

Thanks for your response  

Zanderman

TLDR

But yes, of course house prices can drop. 

They did in the early 1990s leaving many people with negative equity.

Those people, who bought in the late 1980s, had bought in the belief that housing never drops - and they were wrong.  It ruined some people's lives for several years as they could not afford to sell and make a loss so were forced to stay put and pay the mortgage that was higher value than the property.

And of course it could happen again.  Almost certainly will.  It's a matter of when and to what extent.

But no-one can predict anything.  Far too many factors to consider. 

And they shouldn't try to - even a best guess is, I'd guess, probably wrong.

If you want to buy now and can buy now, then buy now and stop worrying.

Stubod

We purchased our first house for £55k and 7 years later sold it for £50k....the house we bought was 6 years old and originally cost £85k and we paid £80k for it, so yes house prices can go down, but it may be a long wait....

dude7691

Zanderman said:

TLDR

But yes, of course house prices can drop. 

They did in the early 1990s leaving many people with negative equity.

Those people, who bought in the late 1980s, had bought in the belief that housing never drops - and they were wrong.  It ruined some people's lives for several years as they could not afford to sell and make a loss so were forced to stay put and pay the mortgage that was higher value than the property.

And of course it could happen again.  Almost certainly will.  It's a matter of when and to what extent.

But no-one can predict anything.  Far too many factors to consider. 

And they shouldn't try to - even a best guess is, I'd guess, probably wrong.

If you want to buy now and can buy now, then buy now and stop worrying.

Yes of course, it really does feel like a distant memory and obviously I wasn't even alive to see it so all I have is history to tell me what that was like! 

Understandable, I guess for me it's just a case of budgeting. If I had an incline houses were going to be unaffordable when I need to buy, I'd just put it in index funds and hope for the best. It's a case of prices could legitimately be 50% higher than they are today within 4 years, don't know how to plan for that scenario. 

Appreciate your advice, I'd tell anyone the same if they could buy today. The price you pay today doesn't matter over the long term, but it does matter when the moves are so massive from a FTB perspective. 

dude7691

Stubod said:

We purchased our first house for £55k and 7 years later sold it for £50k....the house we bought was 6 years old and originally cost £85k and we paid £80k for it, so yes house prices can go down, but it may be a long wait....

Sorry to hear that, I understand it varies massively by area. For my own personal goals, I would be buying this house as my main residence and purely a hedge against inflation and renting for the rest of my life. I have no aspirations to become a landlord, or profit from housing in any way barre not paying rent to a landlord. I would be happy if the price stayed stagnant for 50 years as I never plan on selling. It's just as you can imagine far more important to me the price I get in at, as the growth has very minimal benefit to me as it's a home I never plan on leaving. Thanks for your input  

kuratowski

You can only play the hand you're dealt.  If you're an undergraduate student and not working full time (btw do not even think about misleading the bank that income from a temporary job will be ongoing) then it is probably not the right time to buy a house.

All you can do is save what you can now - which you're already doing - and then deal with the situation as it is later when you are ready to buy.

The right time to buy might not necessarily be immediately after you graduate, either - don't let your aversion to paying market rent trick you into buying an unsuitable property you can afford at the expense of saving a bit longer and buying the right place later on.

Voyager2002

An immediate comment: your strategy is almost asking for failure.

You are a student and you say you receive grants (not loans?). Most students aim to earn more as graduates than would have been possible as school-leavers, and economics is a pretty marketable subect. However, graduate-level jobs require reasonable social skills as well as academic knowledge, and by living in isolation in part of the parental home and become a hermit you are probably stunting your social skills, certainlly not developing the personal qualities that make a graduate attractive to an employer.

Again, you are determined to remain in Swansea but do not seem to have the kind of personal ties that usually make someone determined to live in a particular place. What happens if you are offered an attractive job somewhere else?

In short, the money that you are saving now is absolute peanuts when compared with what you are likely to earn as a graduate if you play your cards right now.

You also mention an interest in living in another country: in order to do so you would need a visa (permission from the government there to become an immigrant) and usually this requires professional skills and work experience: simply having a degree does not get you far. So again, for this ambition to become a reality you would need a reasonable career, which requires both academic achievement and reasonable social skills.